AEOI compliance presents enormous challenges for financial institutions. First, there are the basic differences between FATCA, which targets only US taxpayers investing abroad, and CRS, which targets taxpayers from all participating countries investing in any other participating country. Interpreting the reporting requirements adds still more complexity, as they vary widely among different jurisdictions—such as the requirements for what is reportable or non-reportable. So do the definitions of accounts and individuals which must be reported. Moreover, as with all types of financial regulation, simply keeping up with changes and updates is an onerous task in itself. In such a tangled regulatory web, the risk of critical details falling through the cracks is acute.
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Operational risk has been an increasingly important topic in the alternative investment space, as systems built for fewer, less complex portfolios now need to accommodate portfolios that are increasing in size and complexity. Over the past few years, asset allocators have grown beyond managing money for a single organization or pool, and operational risk grows as processes grow. And while asset allocators have been the driving force behind fund managers upgrading their operational systems and processes, that attitude hasn’t necessarily translated to asset allocators themselves.
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With Phase 6 of Uncleared Margin Rules set to go live September 1, 2022, managers with Average Aggregate Notional Amounts (AANA) in excess of 8 billion are preparing. AANA is calculated slightly differently depending on the jurisdiction. For US CFTC (Commodity Futures Trading Commission) and EMIR (European Market Infrastructure Regulation) regulators, AANA calculation uses the average month-end value from March, April and May 2022. US Prudential Regulators (USPR) use a daily AANA calculation for each business day from June, July and August 2021. If entities in different jurisdictions are subsidiaries of each other, then AANA must be calculated across entities.
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Insurance investment firms have a lot to juggle these days—striving to increase returns in a difficult and volatile market, navigating a complex regulatory landscape across multiple states and geographical jurisdictions, and simply having to do more with fewer people. One thing they should not have to face is an investment accounting struggle caused by their technology or service provider.
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What a difference a year makes. In the first quarter of 2021, the US capital markets were ablaze with discussion over the rise of the biggest challenge to the conventional IPO system ever—SPACs, or special purpose acquisition companies.
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When it comes to the distribution (sales and marketing) of investment products, the variability of product value, changing market conditions and economic outlooks, evolving consumer preferences and behaviors, and technological advancements make the future uncertain. But if there is one certainty in our world, it is that the future distribution landscape will look quite different from the distribution landscape of the past.
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The starts and stops of digital asset regulation have started to congeal around an emerging scheme of regulation. The Biden Administration’s Executive Order on Ensuring Responsible Development of Digital Assets underscores this important development. The order calls for a broad review of digital assets and sets several objectives including consumer and investor protection, financial stability, mitigation of illicit finance and national security risks.
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The economic impact of the COVID-19 pandemic, similar to the 2008 Global Financial Crisis, shows that correlations between market and credit factors tend to be more pronounced in extreme market conditions. In order to respond to, or even stay ahead of such impacts, an integrated approach to market and credit risk analytics is key to success.
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